In a holiday-shortened week, we saw spreads vacillating from strong to weak. The market remained firm though, with only liquidity the main sufferer, as fewer eyeballs were on the market. More focus was paid to the Cyprus unraveling and questions as to if these were to create a precedent, especially in similar institutions in long-suffering states like Spain and Italy. Especially consistent throughout the week was the strength in treasuries, with the 30 year marching to a 3.1% yield from the recent wide of 3.25 plus%.
Fund flows were also mixed with the amounts and direction not pointing toward any trend, merely reaffirming the strength of the market.
The action in Cyprus made for a fresh chapter of Euro uncertainty, dormant for quite a while. Whereas this will in no way cause the demise of the Euro, it creates a fresh rescue drama and threatens to push back the European recovery by some months. We saw the Euro fall as weak as 1.2911 before regaining stature towards the end of the week. Volumes were on the quiet side as participants were in a risk-lowering mode from a cautionary stance against the backdrop of a continuous bull market that we have seen this year.
Some new issues were placed back in the shelves to await a stronger week and get more eyeballs focused. We saw some mixed flows in ETFs and we also note that short interest is on the rise in ETFs although this is structural – institutional players are embracing the asset class as a genuine hedging mechanism and so this short interest must be viewed against this new paradigm.
Investment Grade CDX jumped to the series 20 and the rebalancing saw the new index trading at 90 bps to swaps. Again, this is a function of the constituents of the new index and does not reflect on the market.
Names in play last week included: PXP, FCX, CHK, HNZ , X.
investment grade +90 bps over swaps
High yield .. close to $105 in dollar price.. 6.5% yield to maturity.. was $102 last year!
Emerging market +112 bps over swaps
The much-vaunted rotation from bonds to stocks has not happened. Yet. It has taken second or third place to a rotation from cash to equities and more recently from gold to equities. This is why Gold has dropped down in value to 1578 as fear-driven buyers in yester-years have been the first to jump off the gold wagon as equities gain (and as fear diminishes).
Investors ready for high-yield sell-off – FT.com.
Makes sense. This is really the only liquid vehicle to hedge your exposure. Begs the question of what happens to pure alpha exposure during a panic attack.